Welcome to the March episode of Investor Insights With Brie Schmidt!
Use coupon code REAL for a discount on Midwest Real Estate Summit on June 1-2 in Chicago. Click here for details!
Brie Schmidt is one of the most well-respected buy-and-hold investors in Chicago. Each month we’ll be discussing an investment topic brokers should master.
This month we’re talking about house hacking, the principle of buying a multi-unit, living in one unit, and having the other tenants pay the mortgage. Brie talks about loan limits for conventional (20%) and FHA (3.5%) for multi-unit investments. She also shares the Home Possible program (by Freddie Mac) with allows for a 3% down payment based on borrower’s income relative to median income.
Links discussed in episode…
Conventional and FHA Lending Limits
Use coupon code REAL for a discount on Midwest Real Estate Summit on June 1-2 in Chicago. Click here for details!
D.J. Paris 0:00
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Hello, and welcome to another episode of Keeping it real the only podcast made by Chicago real estate brokers for Chicago real estate brokers. And I really should stop saying that because we have people listening from all over the country, but we do focus predominantly in the Chicagoland market but we welcome listeners from all over today is the newest episode of our monthly series investor insights which we paused briefly last year and we just got too busy and so we are so excited to continue this speeds it’s the number one most requested feature on our show that we sadly just weren’t able to do for a while so we are so excited because we have a brand new host of the series and she if you are involved in the investor community, whether it’s nationwide or here in Chicago, you probably have heard of the name Bree Schmitt, she has all over bigger pockets. I call her the queen of bigger pockets. So if you’re a bigger pockets person, you probably have come across her or you certainly will. After listening to her today. Let me tell you a little bit about Bri Bri acquired her first investment property in 2011. She left the corporate world in 2014 when she became a full time real estate investor. Bree is the managing broker for own firm which is Second City Real Estate, a full service brokerage, working with new investors and also seasoned investors looking to expand their knowledge of the industry and their portfolio. abri utilizes her extensive knowledge of building and managing a portfolio to teach clients and brokers all about aspects of buy and hold investing. Bree teaches you how to analyze potential properties how to calculate your ROI, best practices when marketing and leasing your rental property and how to be a landlord and build a portfolio. A breeze job does not end when you close on a property she is always available to help throughout the process as you scale your business. But he is also the co founder at Midwest real estate networking summit, a nonprofit educational summit for real estate investors and brokers. This three day annual event provides new to experienced investors with the tools and connections necessary to build a real estate business and you should absolutely attend this event. I know people that have attended. Everybody raves about it again, Bri is really really well known in the investor community. You can learn more about this at Midwest, R e summit.com. Again, Midwest RV summit.com. And exclusively for keeping it real podcast listeners. If you are interested in attending and you should attend, we have a special promo code to get you a certain percentage off of the admission price which put in the code real r e a l so with all that being said, welcome to the very first investor insights with Bree Schmidt. So Bri thanks for being on the show.
Brie Schmidt 3:41
Yes, thank you for having me. I’m really excited about it. We are
D.J. Paris 3:45
to okay, I’m just gonna Oh, first of all, we let’s talk just a little bit about you. And by the way, we have an episode that Bree and I did probably a year ago and I will link to it in the in the show notes. And it was one of our most popular episodes we’ve done today. But how many properties do or how many units do you do you own and manage at this point?
Brie Schmidt 4:04
I’ve actually got to redo my numbers because I just sold my first property ever. So I just did my first sale. I sold two properties last week and then I am selling another one this week. Actually, I have to adjust my numbers but it just under 100 units.
D.J. Paris 4:19
Unbelievable and you’re predominantly in the Chicagoland area but also Wisconsin, right.
Brie Schmidt 4:25
Correct. Also, Chicagoland area and then Milwaukee.
D.J. Paris 4:29
Wow. And you’re very active in the BiggerPockets forum. You put it How long is the Midwest real estate summit been happening? That’s couple years at least right
Brie Schmidt 4:39
now. This will be the the event this is the second year going to be in Chicago. The event goes started about five years ago in San Francisco and it spawned off to San Francisco, Philly Chicago coming soon sounds like Texas, or Austin area. So it’s it’s become even though there’s different markets that do it the event is quite similarly. structured across the country, which is, you know, it’s different than a lot of the stuff you hear on the radio, you know, like, hey, come to this, you know, today event and I’ve been to that myself to where, you know, I’m sitting there and after five or six hours of listening to, you know, someone on stage pitch there get rich quick scheme, I end up walking out, you know, and so the the event is really tailored on finding real people, real investors who want to share their story. And that’s I think one of the unique things about real estate investors as a whole, is it’s not just a job for us, it’s a lifestyle decision, right. And it becomes part of our core being as being an investor. And everyone is all about generally sharing information, like, Hey, I messed up, I lost 1000s of dollars, you know, let me tell you how I did it so that you don’t make those same mistakes. And that’s kind of one of the core principles of biggerpockets.com. Because why it’s grown to the level that it’s at. It’s really that paying it forward mentality. And so we’ve tried to bring that same sort of mentality to these events across
D.J. Paris 6:03
the Midwest real estate Summit is a very high, highly, a very top of the line type of event. And you’re right, I always forget that there are the more of the get rich quick types of seminars to this is absolutely the opposite of that. This is the very best speakers in this space, come to this event, and offer their their time that sponsors are big deal sponsors. This is this is a it’s a really high class event.
Brie Schmidt 6:32
Our keynote speaker last year talked about how he went from 4000 units to $26 million in debt. You know, definitely, definitely not a get rich, quick story, let me tell you, but that’s the kind of people that we target, right. It’s people that have been through the cycles, gotten people who’ve made mistakes and are willing to be honest with those mistakes to help other people learn to not do those.
D.J. Paris 6:53
Yeah, that’s, that’s awesome. Okay, so what would you like to tell our listeners? Where are we talking about today?
Brie Schmidt 7:00
Today, we’re talking about House hacking. So if you’ve not heard that term, it is becoming a very, very popular term, especially in the millennial community. And sometimes I wish we were doing videos, I could show that I’m air quoting stuff. So I’m air quoting millennials, but generally speaking, it is a strategy of house buying, that has targeted people in their mid to late 20s, up until their early 30s. And so it’s definitely something that has been talked about very much on bigger pockets. And it’s definitely a strategy that works really, really well in the Chicago market. So that’s what I wanted to kind of go through today is like, what is it? Why are people doing it? And how can you help clients better understand how to execute their plans have been housed actually perfect,
D.J. Paris 7:45
let’s, let’s do it. Okay,
Brie Schmidt 7:48
so house hacking is the term of living in one unit renting out the others, right? It’s actually how I started with real estate investing almost eight years ago. I didn’t know it was house hacking back then. But one of the things that makes Chicago unique as a city is because we have so many of these two to four unit apartment buildings. Depending on the neighborhood, there was a study from DePaul that shows up to 60% of the housing stock in these neighborhoods are two to four unit apartment buildings, that’s quite unique to Chicago, there’s very few cities in a world and the country that have that sort of density. So it lends very easily towards this house hacking strategy. Because what they can do is use low money down programs, live in one unit, rent out the others, and live either for free or have their their housing payments dramatically reduced, that then allows them to save up for another one. So that’s what house hacking is why house hacking is becoming so popular is you’re again, able to use these low money down strategies. So I mean, when I was 27 years old, I didn’t have $100,000 to put down on a house. But I definitely could do a three and a half percent down FHA program, you know, and that’s where this finds these programs are available, doesn’t have to just be a condo or a single family house. These programs are available on small two to four unit properties. So there’s two, there’s two main programs available to people. One is FHA, which I’m sure everyone’s familiar with. The other one is the home passable, which is a 5% down program. So FHA is available anywhere in the city, and has loan limits. So you’re probably familiar with the one dwelling unit loan limit, what you may or may not know is that there’s actually loan limits for how many units there are. So there’s a one unit two to four, I’m sorry, a two unit three unit and a four unit loan limit for these programs. They are on the amount of legal units though, so keep that in mind. If you’re looking at a two flat with a garden unit than that does not count as a three accounts as of two. So it’s very important when you’re looking for clients to double check these loan limits, right if they’re looking at, you know, two flats That that is, let’s say, $600,000, you need to be aware that the max loan limit for FHA is 471. Right? And they’re not gonna, they’re gonna be too high above that three and a half percent down payment amount right to be able to purchase that property. So if there’s a third unit, it has to be legal. That, again, presents a challenge in Chicago, when we don’t know how many legal units there are until we get the zoning cert. And we don’t order the zoning cert, right until after we’re, we’ve when we’re ordering title. So when you’re making the offer, you’re relying on general information from the public, right, either what the assessor says what the Department of Building size, you can do a fly, from information requests on the water records, what the seller size, if they have their old records, right, we’re making a good gas, we’re looking at how the property is metered as well, all of these factors kind of come into play to say, Okay, we think this is illegal three, and at $600,000, then they could buy that as illegal three, we’re hoping it doesn’t come back as a two. And then we’re way too high above the loan limit. So with FHA, though, it becomes quite challenging in a lot of the North Side neighborhoods, especially, you know, anything, anything east of Western is pretty much knocked out of this program. Because the loan limits are too low, the property value of the properties are too high, the program just does not work. It still works though, in areas like Avondale, I would say Irving Park, Portage Park, you can still find properties within these loan limit areas. If you don’t know what the loan limits are, for a two flat, it’s 471 100. For three flat, it’s 569 450. And for a four flat, it’s 707 700. So that you can find a four flat and Jefferson Park for $700,000. That’s going to be a reasonable acquisition for you. The other program that it’s available is the 5% down program, why this program is very attractive to people is the PMI is lower, the PMI does drop off after you hit 78%. And there’s no upfront mortgage insurance premium, which as you know, kind of $12,000 for the buyer. So comparing the two options financially, it makes sense to do the 5% down program for sure. Again, overall, the over the life of the loan, it’s gonna save you 10s of 1000s of dollars. The challenge, though with this program is it’s only available in certain census tracts. So I can give you we can go to the show notes as well if you want in the map, but it’s called the Home possible loan. And so there is a online database where you can type in any address, and it will tell you what if there’s an income limit in that neighborhood or not. If there’s not an income limit in that neighborhood, then you can go for with the program. If there is an income limit in the neighborhood, the challenge is the income limit is generally at $4,000 a year. So let’s say your client makes you know, $80,000 a year, great, this program is available to them, especially for like condos, single family homes, but when you have to add in the rental property, right, because this property generates income, it almost always knocks you out of the program. So I’ve looked at it, I think you need to make like $25,000 a year for the average property to keep under that loan limit. And then if you’re making $25,000 a year, you’re probably not getting approved for 600. Right? So then, so you’ve got to be very careful that this is definitely in the last, I don’t know, four or five years, almost 99% of my clients have come to me that I’ve wanted to house hack will want to choose this program over FHA, again, mainly comes down to the costs. This program also has higher loan limits. So if you don’t want to, I’ll link these in the show notes as well. But for too flat, the loan limit is 620 200 versus FHA at 471 100. That’s a pretty big difference. It’s $150,000 difference in price. So that opens up a lot more neighborhoods to you. Again, the challenge though, is it’s it’s only available in certain census tracts. So areas that kind of east of Western are probably not going to be available based on the income limits of those neighborhoods, that program just just doesn’t become available. But for too flat, the loan limit is four or excuse me, 749 650 and four for flat, it’s 931 600. So it opens up a lot more opportunities because the limits are higher.
This program can also be used more than once. So if you you know you buy your house hack opportunity, you live there for a year you maintain your occupancy requirement, you can then go through the program again. So that makes it again very attractive to these house hack buyers where they’re able to put a little bit of money into it. Now they’re living for free for the next year. They’re saving what they were putting into rent, and then they’re saving what they’d already been saving before. After a year, generally they have enough money to do the program all over again and buy another property. So it bodes very well, for millennials who are a lot more mobile and willing to move. I’ve had clients that have done this three times now, where they’ve just moved every year from property to property. Now, once they get that, usually after the second or the third, they get to be a little bit older and different in their life stages. And then it’s like, okay, we’re not doing this anymore. Let’s find a property that either has a duplex down for them to live in and grow in, or let’s just move into a single family house and get an O’Neill stop living next to tenants. But it definitely helped add the first couple of years to, to use these programs to house hack.
D.J. Paris 15:44
So yeah, I see a huge opportunity since the vast majority of our listeners are brokers, to instance, a lot of the people we’ve interviewed on the show who are top 1%, producers started out doing educational seminars to their buyers and sellers. In particular, first time homebuyers the the move from renting to buying is obviously a very common type of webinar or seminar that brokers will do to to get, you know, client interest, and to be that educational source. And now I think there’s this huge opportunity to do a house hacking seminar, right, and you can invite your clients and I would assume there’s a lot less competition in the house hacking seminar world, among other brokers, right. Most brokers just aren’t familiar with it at all. And certainly the clients, you know, will be more interested, especially the ones that renting and maybe even not just renting, maybe the buyer buying clients. So I don’t know if you’ve seen brokers doing that having success, you know, hosting types of these types of seminars.
Brie Schmidt 16:45
Yeah, I mean, I host one quarterly. I also know another agent that focuses on two to four units as well, he hosts seminar events, as well, it’s the the buzzword of house Hacking has become extremely popular in the last couple of years. So it has definitely helps for people to understand, you know what it’s like that a lot of people that come to me have the same questions, right? It becomes very, my conversations become very, very repetitive. Things like, you know, well, the horror, the the thought of having tenants knocking on your door at two o’clock in the morning, right?
D.J. Paris 17:20
Where do you live downstairs?
Brie Schmidt 17:23
Yeah, you know, that’s, that’s like the number one, the number one concern people have with House hacking, right? is, you know, well, how am I going to there’s there’s so much to learn, not only about because now you’re taking it from beyond being just an agent, right? An agent finds you a home. Right? Right. But when you’re dealing with House hackers, you become the person that has to teach them how to how to analyze investment properties, right? If you don’t know what the words capex vacancy repair, you know how to how to run those metrics, your best bet is honestly to refer it out to an agent that does for sure, your air, you’re entering into an area of like ethical irresponsibility. But you become much more of an educator off the bat, because you’ve got to explain to them, you know, hey, I think that this is what your capex should be. And then you need to explain why, right, or this is what other investors have seen in the marketplace, you know, and then be able to explain why. One of the things that I find very beneficial, and I tell everyone with my clients is that I’ve been doing this for so long. I have so many clients that only do that, like this house hacking thing. If they’re looking at a neighborhood that they’re not familiar with, like, Hey, I’ve never been to Avondale, let’s say, right? Chances are I have a client who has bought a property within three blocks of where they’re looking. And most of my clients will take these phone calls and say, Hey, remember, you know, when you were thinking about moving to Avondale, and you were unsure of the neighborhood, I’ve got someone who’s looking to make an offer next week, would you mind a 10 minute phone call with them, tell them what your experience has been like. And that also helps like ease a lot of their concerns. But not only after they purchase, once they close your job is not really over with people are going to have questions. I get questions all the time. You know, what, what should I do with my pet policy? Right? Or, you know, my tenant is it’s the sixth of the month and my tenant hasn’t paid rent, how do I issue a five day right? Right? So what’s the what’s the Chicago landlord tenant Oregon say about these things? You know, that’s a really big one you have to know the Chicago landlord tenant ordinance and be able to assist clients above and beyond just finding them a home that looks pretty. It’s much more evolved past that. The benefit, though, also is that most of my clients are repeat. Yeah, of course. You know, they’re does it no investor comes to me and says, I want to buy one property, but I’m done. Right? You know, most of them are like, Hey, I have X amount of dollars. How can you help me buy as many properties as humanly possible and like, what is that going to look like? How long do I need to take? You know, and that’s that’s kind of our plan is we immediately consult with a lender. Um, Before we even look at our first property and go through what the long term plan is, how are we going to use? How are we going to leverage loans now, that can benefit us down the road for acquiring more properties? Because that’s really the end game.
D.J. Paris 20:13
Yeah, and what percentage of brokers and there’s I mean, there’s about 40,000 in the Chicagoland area, including the suburbs, but what percentage would you estimate as, as a managing broker yourself, really understand investments to the level that they can responsibly? You know, advise their clients?
Brie Schmidt 20:31
Honestly, from my experience, maybe five or 10%?
D.J. Paris 20:35
Yeah, so this is a huge opportunity for our listeners, who probably may have been listening, you know, the first 15 minutes and going, Gosh, I really don’t follow a lot of this, like, no, that’s normal nine out of 10 of you wouldn’t have followed it to the level that that Bree does, or myself even. I mean, I’m in that same 90%. So, you know, it’s like, here’s this amazing opportunity to become, you know, more skilled in your profession, and to be able to offer a whole nother line of service to your clients. So it’s like, okay, well, how do you start learning that information? Well, you do things like you join bigger pockets, you start reading you, you listen to podcasts, and you know, and more, most importantly, you go to things like the Midwest real estate Summit, right? This is the place where people learn how to actually do this. And,
Brie Schmidt 21:26
and then the association Chicago Association of Realtors also offers classes, I believe, on how to analyze property, right? There’s there’s dealing with investor clients, there’s like, one level, and there’s a two level as well. You know, what are these terms that they’re talking about? And how do you calculate these? Right Is it a lot of it also comes from just general knowledge. So my team, there’s four agents that comprise my team, between the four of us, we own over 200 units, and all of my agents, myself included, all work in areas that we personally invest in, that’s part of our pitch to picture is, hey, you know, where we’re showing you properties that we own in that same neighborhood. So a lot of times, we’re using our own numbers, like, I always tell clients, you know, hey, I will run your vacancy numbers at 3%, let’s say on the north side of Chicago, you know, but I can actually show you my actual numbers over the last eight years, that my vacancy rate actually is a quarter of a percentage, but I want to be conservative, and show you that, you know, we’re gonna lose your 1010 years of production numbers on what we would call a poor forma. So all that very important, but it all it all takes time, there’s definitely resources out there, to learn these things. And to deal with investor clients, they are there different. I mean, I like dealing with investor clients, because I can be, I don’t sugarcoat things. You know, I can be very, very blunt, and very honest about my opinion of the properties. And I don’t have to, you know, always smile, and talk about how pretty the whole spiel there, you know, that’s just not me as a person or not my personality. So I definitely don’t have to do those things, I get to go down to the facts and the numbers and what makes sense logically,
D.J. Paris 23:12
yeah, and also the investors tend to to be less emotional, because it’s, it’s a different type of purchase.
Brie Schmidt 23:19
Correct. It is a different type of purchase. So even before we go see a property, we run a basic initial analysis on the property to determine what we think that productive cash flow is going to be. And then that determines whether it’s worth going to actually do a showing or not.
D.J. Paris 23:35
Yeah, and this is, so if your head is spinning, that’s actually a good thing. Because you know, this is something where you can over time, and it’s going to take time to really develop the skill set to be able to have these conversations in the interim, you know, breeze absolutely right. You should probably refer those clients until you’re able to proficiently talk about it. And there are brokers like Bree, you know, who do brokers call all the time and say, I don’t know how to have this conversation. And you know, she’s able to either assist them or someone on your team or she’s able to teach you how to do that. So over time, you then can, but I think brokers are just missing out on such a huge opportunity. I mean, house hacking is all over the news right now. And brokers are probably just, you know, it’s not their day to day life. Most brokers and this is something that they can open up, and they don’t over time, they can get to a place where they don’t have to refer.
Brie Schmidt 24:31
Correct as with Chicago being the Think about the neighborhoods of Chicago, not the downtown Napa River North, not that stuff up but the actual neighborhoods of Chicago next time you’re driving down the street, pay attention to how many of these properties are two to four units versus how many these properties are single families, that a lot of these neighborhoods, it’s over half. So it’s definitely an area that you know, there’s there’s a definite market for it, right. And as the city continues to evolve. We’re evolving into new neighborhoods, you know, new net new areas are becoming hip and trendy for millennials. And that’s where they’re wanting to live.
D.J. Paris 25:11
Yeah, no, I mean, you’re you’re so right. So for everyone listening, this is what this series is for right to expose our brokers, not just to traditional realtors who help people buy and sell primary residence, and you know, they’re usually not multifamily. You know, this is an opportunity for our listeners to get exposed to, you know, investments and investors and how to talk about it. So in future episodes, we’re going to do deeper dives into all sorts of aspects of investments and working with investors, how to run numbers, marketing, and really just how to add this as as you know, our whole purpose of this podcast is to expose you to people who are the very best in the industry here in Chicago and the suburbs, how they’re doing it so that you can replicate or duplicate their success. They’re generous people like Bree to devote their time to helping so this is, you know, a new a new area that we’re exploring as well. So we need your help. So as you’ve listened to this episode, we thank you, and let us know what additional topics investment wise, you know, Bree is about as big an expert as as we’ve ever had in any area of real estate. So we’re very lucky to have her shoot us your questions, let us know what you’d like us to cover. You know, we do this strictly for you. So you can find us on Facebook, keeping it real pod. Our website is also keeping it real pod.com Of course on iTunes, Google Play Anywhere podcasts or server, you can email us right from our website and let us know. Hey, I have a question. And you know, we’re so lucky. And Bri we’re so grateful to have you. And by the way, again, everybody who’s listening, give Midwest real estate summit a chance check it out. Just go to the website, and you’ll see the quality of the caliber of speakers they have including, obviously, Bri you know, the sponsorships are all high level of the website, again is Midwest, ar e summit.com. And the discount for our listeners is the word real. So do that. And we will see Bri on the next episode. Again. Thank you so much for our very first Bri Schmidt investor insights.
Brie Schmidt 27:26
Thank you for having me. I look forward to meeting you guys are talking to you guys next month.
D.J. Paris 27:30
All right. That will do it for this month. We will see Bri again in a month from now send us your suggestions. And thanks for listening. Remember to tell a friend, if everyone goes out there and just tells another broker about this program. We can help even more people. So thanks again and thanks Bree.
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